US investment managers seek to tap Biden’s war machine to recover 4 billion out of 161 billion of Ukraine debt prior to a Ukraine debt default?
Let’s start with the 2024 Ukraine government budget, published in November 2023:
Міністерство Фінансів України (mof.gov.ua)
“State Budget revenues have been increased by UAH 22.2 billion compared to the first reading and will amount to UAH 1,768 billion.
Expenditures amounts to UAH 3,355 billion, including general fund expenditures of UAH 3,120.6 billion and special fund expenditures of UAH 234.5 billion.”
One US dollar buys around 40 Ukrainian Hryvnia (well “officially” anyway – who knows what the black-market rats are). So, revenue was budgeted at around 40 billion dollars and spending at around 85 billion dollars.
Given Russia occupies around one third of Ukraine and has reduced another ¼ to rubble (rouble>) one has to ask what Ukrainian assets are producing what taxes. Maybe a million Ukrainian men have been drafted from the private sector into the armed forces?
This article posits that Ukraine is about to default on 4 billion of government bonds held by Us investment managers, but that this will lead to a general default on over 161 billion of other Ukraine debt leading to the collapse of Ukraine as a sovereign nation.
It will exist only as a battlefield, sending weapons to be destroyed and classifying these as “overseas aid” from NATO aligned countries.
As such it will become a battlefield for who can supply the most weapons for the longest time. Heaven forbid that the massive depletion of military equipment in NATO countries results in an invasion of Europe to take advantage of a severely weakened NATO capability – barring nukes.
Let’s make a distinction with a huge difference at the outset. This article focuses n DEBT, not AID provided by NATO - the humanitarian and military assistance provided to Ukraine is a donation of aid that is a gift and will never be repaid. 100’s of billions of dollars of gifts, with the US accounting for the great bilk f that.
Maybe the military portion of those hundreds of billions has already been captured or has been destroyed. There will be no accountability for this ever in Ukraine, maybe from the donors, but certainly not from what has always been one of the world’s most corrupt countries.
I am not suggesting that Ukraine “sells” the donated military equipment to Russia pr a third-party government. Or that it disguises the “sale” by arranging to surrender weapons to Russia at mutually agreed times and venues.
Nor am I belittling the deaths of what, 600,000 Ukrainian fighting men or 150,000 Russians.
Perhaps the UN can use its human trafficking expertise to replenish the loss of life in Ukraine with people from other countries as Rwanda is seeking to do after its genocide of 800,000 people a few decades ago.
Remembering the Rwandan genocide 30 years on – how did it happen? | Genocide News | Al Jazeera
It has been three decades since the April 1994 Rwandan genocide when members of the majority Hutu ethnic group killed an estimated 800,000 minority Tutsis, moderate Hutus and members of a third ethnic group, the Twa, in one of the darkest episodes in world history.”
Citing a Wall Street Journal article, the excellent Expose-news.com is out with a piece today here:
“A group of foreign bondholders have taken steps to force Ukraine to begin repaying its debts as soon as next year, the Wall Street Journal reported on Sunday.”
Reading a little further it looks more like foreign bond holders are seeking to get as much money back as Ukraine is able to repay!
“The group, which includes investment giants BlackRock and PIMCO, granted Kiev a two-year debt holiday in 2022, gambling that the conflict with Russia would have concluded by now.”
From memories of my past investment research, Franklin Templeton has been a long-term holder of Ukraine bonds, but it is not mentioned.
Check this out from ten years ago:
Franklin Templeton lifts Ukraine bet by over $250 million - InvestmentNews
“Franklin Resources Inc.’s biggest funds purchased Ukrainian bonds in the fourth quarter, adding to holdings that made the asset manager the country’s largest debtholder before growing violence spurred unprecedented losses.
The U.S. versions of the Templeton Global Bond (TEMGINI) Fund and the Templeton Global Total Return Fund (TGTRX), overseen by Michael Hasenstab, increased holdings of Ukrainian international dollar debt by $252 million in face value to about $3.8 billion, according to data compiled by Bloomberg through Dec. 31. Along with their European counterparts, the funds hold about $6.4 billion, more than a third of the country’s external dollar bonds, their most recent filings show.
The current holdings are here:
Templeton Global Bond Fund - A (Mdis) USD - LU0029871042 (franklintempleton.co.uk)
PortfolioHoldings-TempletonGlobalBondFund-256-GB-en-GB.pdf (franklintempleton.co.uk)
No sign of Ukraine – maybe because the holdings have dropped to an insignificant value!
Couple more “bits” of information for context.
From her in March 2024e:
Ukraine FC Rating Lowered To 'CC' With Negative O | S&P Global Ratings (spglobal.com)
“On March 8, 2024, S&P Global Ratings lowered its FC long-term sovereign credit and issue ratings on Ukraine to 'CC' from 'CCC'. The outlook on the long-term sovereign FC rating is negative. At the same time, we affirmed our 'C' short-term FC rating and our 'CCC+/C' LC long- and short-term sovereign credit ratings on the sovereign.”
FC stands for foreign currency and LX = local currency. The ratings drop from CCC to CC to C to D which = Default.
From here: Ukraine Government Bonds - Yields Curve (worldgovernmentbonds.com)
Last Update: 8 May 2024 2:15 GMT+0
“The term credit default swap (CDS) refers to a financial derivative that allows an investor to swap or offset their credit risk with that of another investor. To swap the risk of default, the lender buys a CDS from another investor who agrees to reimburse the lender in the case the borrower defaults.”
“Current 5-Years Credit Default Swap quotation is 550.90 and implied probability of default is 9.18%.
Now, if my recollection of CDS is valid, this is a price per 100, so to “buy protection” from default of Ukraine debt n its bonds will cost 5.5% PER ANNUM over the next five years (with an assumed “recovery rate” of 40% in the event of a default.
How much of Ukraine will be left in five years? How much of Ukraine will be producing anything of value to repay interest and debt?
Which is interesting! Just a one in ten chance of a default by Ukraine! If Russia annexes the whole of Ukraine will Russia honour (pay) the odious debt of a despot financed by the US government?
For those seeking an explainer of CDS, try this from here:
WhitePaper_Wen.pdf (bloomberglp.com)
Which has this formula for calculating the price of a CDS:
Have at it! Haha.
I do not have access to a Bloomberg anymore, but from here in 2022, there was this:
Ukraine Swaps Signal 90% Chance of Default as Russia Attacks - Bloomberg
“90% probability of default within five years
Signs of distress in Ukraine’s debt markets deepened after Russia attacked, with credit-default swaps signalling about 90% probability of default within five years. The contracts surged to the highest since the country restructured its obligations in 2015, according to data compiled by ICE Data Services.”
Ny credit market players out there with better information? Please comment!
So, back to the Expose-news.com piece citing the WSJ article.
“With no end to the fighting in sight, the lenders have now hired lawyers at Weil Gotshal & Manges and bankers from PJT Partners to meet with Ukrainian officials and strike a deal whereby Ukraine would resume making interest payments next year in exchange for having a significant chunk of its debt written off, anonymous sources told the Wall Street Journal.”
I suggest that this is normal practice in the event of default – so the bond holders are doing the paperwork ahead of an upcoming default that the credit rating agencies will confirm AFTER these details are worked out.
Which rather begs the question.
“How much of the carcass of what is left of Ukraine will be “freign government aid” provided mostly by the US taxpayer?”.
Here’s more from the article:
“The group holds around a fifth of Ukraine’s $20 billion in outstanding Eurobonds, the newspaper reported. While this figure represents a fraction of Ukraine’s total external debt of $161.5 billion, servicing the interest on these bonds would cost the country $500 million annually, the bondholders said.”
Total debt of around 161.5 billion!
I wonder who that other 157 billion is owed to, that the investment managers are taking their 4 billion.
Which raises another question. Franklin Templeton may have been invested for well over ten years, but what is its policy and that of other fund managers like PIMCO and BlackRock to investing in countries at war? Maybe there are lessons from investments in South Viet Nam in decades past.
Remember, investment managers do not own the assets they invest. These belong to the investors – investment managers are AGENTS of investors and can only invest in accordance with he terms of an investment management agreement and/or Trust Deeds.
Perhaps the CDS prbabilty of default is a proxy for what the market expects will be left of Ukraine in five years’ time.
Russia has around a third of Ukraine already - the CDS price thinks that’s a lock.
!Onwards!!!
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Four out of 161 ain't too good, but we had better take it while we still can.